Thursday, March 28, 2013

I have been reminded by several correspondents, to whom I
am grateful, that the Three Big Airlines are not the only ones flying the
skies.

Indeed there are others, and a conversation recently with
a Chicago-based United employee emphasised that point. She said that during a
recent phone call, Jeff Smisek, United’s CEO, had made the point that as they
watch over their shoulders at competition, Southwest was the carrier that most
concerned him. Their growth was strong, their business model sharp and they were starting to make inroads to their lucrative commercial accounts. Presumably the same holds true for the other giants.

·It is important to note that these figures do
not include Sky West; this carrier specialises in contract flying for the major
carriers, and operates a fleet of 740 aircraft carrying 58,800,000 passengers,
primarily (although not exclusively) for United Airlines.

Now a quick glance at these figures will show a very
interesting story. The three leaders, representatives of the three major global
alliances are significantly bigger then Southwest plus the next six largest carriers.
In these days of the dominance of market leaders, this position is important
because it is the dominance of hubs, by the number of slots available that
determines a carrier’s ability to compete.

Carriers’ growth is also determined by their ability to
interline, that is to carry passengers on a through-journey between two or more
unrelated airlines; while carriers such as JetBlue and in Canada WestJet have
been looking at these partnerships as a vital way to increase revenues, others
such as Southwest so far are resolutely sticking to a business model that has
worked very well up to date.

Carriers with particular market niches, such as Alaska
and Hawaiian, also have significant advantages, however their geographic
benefits may be jeopardised by their isolation, and the inability of their home
markets to grow as fast as they may wish.

Fuel is the primary cost concern for carriers, and to
that end, in June 2012, Delta Airlines paid $180 million to purchase an oil
refining complex from Phillips 66; this shrewd acquisition will certainly allow
them more balance and strategic planning than either the current futures or
spot markets will do.

Southwest is coming to the end of a very successful
long-term fuel contract, and it will be interesting to see how they fare into
the future, and for the smaller carriers, the current and future cost of AvGas
will determine their futures.

We will see how this all spins out; clearly there is room
for smaller niche carriers, and I for one am delighted to see them remain in
the market. They have opportunities to contribute to the overall growth of the
airline industry, and with it the growth in many related businesses and the
health of the economy in its widest form.

As we all know, statistics are chosen by the writer, and this
piece is not meant to be a detailed analysis of the contemporary airline
industry; there are many, many other considerations, and profitablility is
probably the most important.

Profits in this business have been elusive for decades,
and perhaps this consolidation will allow investors to gain a return and
passengers to feel confident that their airline, of whatever size, will
actually be there to carry them on their next journey.

For those interested, there are many interesting sites
that detail every aspect of airline activity; even to the point of revenue per
flight attendant, a curiously important measurement. However, the overall numbers don’t lie; three airlines
dominate with a fourth nipping at their heels. The rest are falling behind.

Thursday, March 21, 2013

I remember the heady days of the mid 1908s when Jimmy
Carter deregulated the American airline industry. Henceforth anyone could fly
anywhere, competition would rule the skies and air travel was suddenly open to
a wide section of the population previously resigned to staying at home or
going by bus.

They were the days of Freddie Laker and People Express;
of new routes popping up every day and the birth of such fine carriers as
Vanguard, Air Florida and ATA seeking to fill these new and exciting voids.

Business, however, is a rather interesting beast. While
competition is lauded as the consumers’ best friend, it is a fleeting benefit.
Businesses care only about their own balance sheets, and while for a period,
the interests of their own seem to coincide with those of their customers, it
is a relationship that never lasts for ever. As soon as they can do so, prices
rise, bonuses roll in the executive suite, staff gets laid off and the hangover
begins.

Business is, to put it bluntly, a commercial form of
Darwinism. Business absorb weaker businesses, usually under the guise of some
illusory benefits to the customer, evermore dangerous games of industrial
chicken end with commercial collapse or further consolidation (all for the
consumers’ benefit, of course) and now we are left with four airlines in the
USA.

Delta, United and American along with Southwest now
control the friendly skies, and it remains to be seen how long this will last
before Southwest is gobbled up by one of the Big Three.

For it is no longer an American game; United is a part of
the Star Alliance, American works with OneWorld and Delta is the American
partner in the Sky Team alliance. Each of these three global alliances seek to dominate
huge swathes of the world, offering their clientele lounges, happy faces, “seamless
connections” and piles of other advertising drivel thatwill cement the global relationships that control
the product offering.

And the tourist traveller, the very poor cousin of the might
corporate passenger, is left with dwindling choices. The growth of
consolidation within the tourist industry, leaving a few, mainly European-based
companies in control of an ever larger number of brands and thus customers will
serves to only further restrict choice, although cleverly doing so under the
disguise of competition.

Do you know why Hotwire.com will offer comparisons with
Hotels.com prices? Because they are both owned by the same group that also
controls Trip Advisor and a number of other well-known on-line sites. Altruism?
Consumer Choice? Not a chance.

So we now see three airlines, and by extension their
global partners gaining strength, and watching the brave financiers who placed
massive sums of money into the industry over the past twenty years finally
getting their just rewards; and these rewards will be substantial.

Billions of dollars have been bet on the survivors in the
airline industry, keeping the behemoth companies afloat in oceans of red ink.
Finally the winners are being unveiled, and it is time to pay the pipers who
have called the tunes; and consumers will face higher fares, higher fares,
decreasing space and tighter schedules.

There is, however, a silver lining. Buy airline shares
now, (Delta, United and US Airways are good bets, as is Southwest for a
slightly different fiscal dynamic) and use some of the profits that will be made
to pay these additional fees. But make no mistake; it is payback time for the silent
financiers of the industry.

And Jimmy Carter must be wandering what he started. It is
quite true that without deregulation millions of journeys would not have happened
and the world today would look rather different from the way it does. I hope,
however, that thirty years further on, we do not look back longingly at the
period between 1985 and 2015 as the halcyon days of travel.

Now, it is the time of the airline executives to examine
the future that we all have, and not simply rely on the misleading drivel that
their advertising companies love to put out. Will air travel remain the purview
of many or return to being the privilege of the few.